Pramerica SGR considers sustainability factors as a source of greater knowledge which must permeate the entire investment process for our socially responsible offerings.
Our aim is to integrate the assessment of ESG factors in our evaluation of investment alternatives and in how we build ESG portfolios for our investors. We have developed an ESG investment process which integrates the financial assessments for each asset class and management style with an analysis of the sustainability of investment alternatives which we consider for our clients’ portfolios in terms of both risks and opportunities.
This internal process is based on six fundamental pillars.
1. Exclusions for involvement in controversial activities
Pramerica SGR’s socially responsible offerings are an expression of our desire to contribute to positive change and the exclusion of the issuers of securities involved in controversial activities is an important step in this direction.
• Some controversial activities (e.g. anti-personnel mines, cluster bombs, munitions, tobacco production and pornography) are excluded from the sphere of investment in our ESG portfolios no matter how they may be involved.
• In other cases (e.g. gambling, manufacture and distribution of armaments for civilian use or conventional armaments, distribution of tobacco) consideration is given to the degree of involvement in the controversial activities in order to exclude companies which generate a significant percentage of their sales from these activities and whose core business activities do not conform to the environmental and social sustainability principles adhered to by Pramerica SGR.
Specific or more stringent exclusion criteria may be defined on the basis of the specific characteristics of some of Pramerica SGR’s socially responsible strategies.
2. Team of ESG specialists
The first step in assessing the sustainability of an investment consists of identifying specific ESG criteria, in terms of risks and opportunities, for the issuer, based for example on the geographical area or sector of activity.
In order to identify and assess material ESG risks and opportunities for each investment alternative we decided to employ a team of ESG analysts working across all parts of the investment area with a matrix structure and ESG specialists within each management team (government bonds, corporate bonds, equities and fund selection).
With ESG experts specialised by asset class working together in the investment area we are able to construct a solid approach to sustainable investments because we feel that ESG integration also requires shared expertise.
3. Sustainability score for investment alternatives
Environmental, social and corporate governance criteria constitute a new point of observation for the analysis and selection of investment alternatives for our investors’ portfolios.
The ESG ratings and metrics available to our investment managers therefore constitute a fundamental dataset on which to base a complete due diligence for the analysis, selection and management of investments for our clients.
We consider that it is important to develop a solid and shared internal approach in order to be able to assess ESG risks and opportunities that allows us to integrate different and varied information and metrics:
• issuer derived information;
• studies by supranational bodies;
• detailed ESG ratings and metrics from providers specialised by corporate and government issuers and by funds;
• specialist provider analyses and outside studies;
• expertise developed in-house.
The evolution of this approach is leading us to the definition of a proprietary sustainability score.
4. Portfolio average ESG rating
Pramerica SGR’s socially responsible offerings have an average ESG rating as a summary indicator of its sustainability profile.
The average ESG rating is calculated as the weighted average of the ESG instruments held in portfolio covered by sustainability ratings and it is expressed as a score of 0-10 (with zero as the lowest sustainability and ten the highest), and the letters CCC-AAA (CCC is the lowest and AAA is the highest sustainability).
An average ESG rating is calculated for each Pramerica SGR’s socially responsible solution with consideration given to the characteristics and constraints derived from the specifics of the asset class and the product and it can be expressed in absolute terms for ESG solutions with no benchmark, or in terms of a percentage compared to that of the benchmark.
Define a portfolio minimum average ESG rating rather than a precise one enables Pramerica SGR to participate in a process of transition towards sustainability by investing not only in issuers which already have high sustainability ratings within their own specific sectors, but also in those which according to our assessments of environmental, social or corporate governance criteria present prospects for improvement in their sustainability profile even if their current ESG ratings are not high.
In addition to the average ESG rating, a maximum percentage is set for unrated instruments that is permitted for each solution of Pramerica SGR’s socially responsible offerings.
5. Multi-asset approach
In order to allow our investors to invest in a portfolio created with a responsible approach, in managing our ESG solutions, we have developed an ESG specific due diligence for different types of investment instrument, and therefore for direct investments in corporate and government securities (equities and bonds), and for investments in funds.
For the purposes of ESG sustainability assessment, material ESG risks and opportunities differ not only according to the asset class and the sector in which the issuer operates but also on the basis of the type of instrument.
The ESG specific due diligence:
• Corporate issuers: we select and weight specific ESG indicators on the basis of the issuer’s field of activity and the materiality of the risk and performance factors.
• Government issuers: we integrate the performance indicators of a country with the ESG risk and opportunity factors which impact its value creation process and therefore with exposure to ESG risks and their management.
• Funds: our process integrates proprietary quantitative selection with ESG analyses both at fund and fund house level in order to fully assess the approach to sustainability employed by the outside parties that we select.
6. Engagement or active ownership:
We believe that to integrate ESG criteria in our investment philosophy it is important to have an in-depth knowledge of the companies we choose to invest in by maintaining a constant dialogue with management: at Pramerica SGR we have over one thousand meetings per year with European companies.
In each meeting, amongst other things, we discuss the impact of specific ESG issues in order to make a direct assessment of the company’s position, its objectives and its potential for improvement in the process of transitioning towards sustainable management.